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Tuesday, 30 April, 2002, 09:31 GMT 10:31 UK
What's happening to the housing market?
First-time buyer market expected to slow down towards the end of the year
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By Sarah Toyne
BBC News Online's personal finance reporter
line

The housing market is yet again giving the impression that it is running away with itself.

On Tuesday, the Nationwide building society reported its biggest monthly increase in prices. On average prices rose by 3.4% in April compared to the previous month, and by 16.5% year on year.

Much to the chagrin of first-time buyers, rises seem irrepressible - any dip in the market, such as that experienced shortly after 11 September, now seems an eon ago.

But what is happening beneath the statistics? Are properties becoming over-priced? Are we heading for a housing crash?

Price trends

In the short-term, house prices are on average expected to rise, peaking in the summer, according to economic think-tank the Centre for Economics and Business Research.

But price rises are then predicted to edge down by 2% in the second half of the year.

Martin Ellis
Martin Ellis of HBOS

Martin Ellis, HBOS economist, told BBC News Online: "The market will not crash. It is not the same as in the late 1980s because interest rates are low and there is little prospect of a huge increase.

"But clearly as prices are high in relation to earnings it is difficult to get on the housing ladder, and that is one reason why the market will slow down in southern England. However, low mortgage rates will sustain the market overall."

Other trends, such as a continuing demand for housing, are also expected to maintain the market.

According to the Nationwide, with only just 10% of new housing accounting for house sales, demand is translating into sharp price rises.

Despite a growth of the residential retail sector over the last few years, Britons are also unlikely to lose their passion for buying homes in the longer term.

Jim Atkins, president of the National Association of Estate Agents, says that this will maintain the market's equilibrium.

"People in the UK still have this desire to own their own property and improve their homes, by moving from property to property," he says.

"We have got increased mobility of employment and people move from firm to firm and area to area."

Unaffordable housing

Despite these encouraging signs, property prices have rocketed and many people are overstretching themselves to get on the property ladder.

Some people may be concerned that we are heading for a repeat of the housing crash and negative equity, which dogged the lives of many in the early 1990s.

A quarter of a million homes were repossessed from people who bought when the market peaked in the late 1980s, but were then unable to meet their repayments after mortgage rates doubled.

As now, people were overstretching themselves to purchase a property.

  House price earnings ratio graph

In London, for example, they were spending on average 6.1 times their gross earnings on buying a house - just slightly more than today's levels of 5.5.

The average over the last twenty years has been 4.2.

Danger signs?

The difference today is that while the cost of purchasing a house is increasingly expensive, mortgages are very affordable.

According to the Halifax, back in March 1990, 41% of a first-time buyer's gross earnings were on average soaked up by mortgage payments.

Today only 15% of gross income is spent on mortgage payments, a drop from 21% last July.

  Mortgage earnings ratio graph

While interest rates are expected to rise over the next two years, any upward movement is expected to be much less dramatic.

For example, both Halifax and the Centre for Economics and Business Research predict that interest rates will rise to 4.5% towards the end of the year, with Halifax predicting an increase to 5.5% within two years.

Even so, this slight movement should have an effect on the market by making mortgage payments slightly less affordable for homebuyers.

Experts believe that this should contribute to a cooling of the market towards the end of the year, particularly at the lower end of the market.

Other market indicators

At the moment, however, sellers continue to achieve better prices, according to Hometrack.

Prices actually achieved as a percentage of the asking price rose sharply from 94.7% to 95.7% in the month to 15 February.

But buyers, who have had a torrid time in recent years, should take comfort from the fact that the benefits of a rising market for sellers is often overblown.

This is because most people selling will be trading up, and buying a more expensive property.

Word of caution

Jim Atkins
Jim Atkins: Long-term investment

Knowledge of the local market, an ability to achieve a good re-sale value as well as other factors that are likely to influence house prices - such as proximity to good schools - are especially important for buyers, say experts.

Thanks to the internet, it is much easier for buyers to judge the state of the housing market in the area they wish to purchase.

There are a number of websites where people can get information on prices and neighbourhoods, such as Upmystreet.com and the Land Registry website.

Nationwide, Halifax and Hometrack surveys are also available online - and Nationwide, for example, has an easy to use price calculator.

Borrowers are warned by financial advisers not to overstretch themselves and they can fix their mortgage if they are concerned about rising interest rates.

Mid- to long-term investment

While the market does not have the same correlation between high prices and high mortgage rates as it did in the early 1990s, buyers are still advised to be cautious - and they must view property as a mid- to long-term investment.

It took almost 10 years for many people to get on an equal keel after the negative equity of the early 1990s.

On average people who bought at the peak in May 1989, had to wait until January 1998 to see their properties reach the same value.

The housing market on a national level and in many parts of the country is not the place to make a quick buck.

Experts stress that it is even more important for people to view property as an investment in the future.

"Any purchase of a property has to be a medium- to long-term prospect," says Mr Atkins.

House price earnings ratio
Source: Halifax
  Return to story

Mortgage earnings ratio
Source: Halifax
  Return to story
See also:

28 Feb 02 | Business
House prices keep on rising
21 Jan 02 | Business
Banks curb mortgage lending
26 Feb 02 | Business
House price divide widens
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